China Jinjiang Environment Holding Co. Ltd. Outlook Revised To #BB# Rating Affirmed

Stocks and Financial Services Press Releases Thursday June 28, 2018 11:38
HONG KONG--29 Jun--S&P Global Ratings

HONG KONG (S&P Global Ratings) June 28, 2018--S&P Global Ratings revised its rating outlook on China Jinjiang Environment Holding Co. Ltd. (CJE) to negative from stable. At the same time, we affirmed our 'BB' long-term issuer credit on the company and our 'BB-' long-term issue rating on the company's senior unsecured notes.

CJE is one of the largest waste-to-energy (WTE) companies in China.
The outlook revision mainly reflects CJE's reducing financial buffer for the rating over the next few quarters because of the company's weakening cash flows and increasing capital expenditure.

In our view, CJE's technological upgrade of its eight existing WTE facilities (representing approximately half of its existing capacity) since the third quarter of 2017 will weigh on its cash flows. It could also push up the company's capital expenditure by about Chinese renminbi (RMB) 1 billion.

In addition, CJE's accelerating overseas expansion in developing countries such as Indonesia and Brazil could constrain its credit profile. As a result, we expect the CJE's ratio of funds from operations (FFO) to debt to deteriorate to 13%-15% over the next 12-24 months, from around 17% in 2017.

CJE expects the capacity upgrade to help it to meet the increasing demand for waste treatment in large cities due to the continuous net inflow of population. The capacity upgrade should increase CJE's waste treatment volume by about 5,000 tons per day (tpd) from 28,280 tpd as of end-2017. The upgraded facilities will also have lower emissions and coal usage, thereby improving cost efficiencies, as well as help to meet tightening emission standards.

We believe CJE's capacity utilization will remain low at about 75% in 2018, compared with about 80% in 2017 and about 90% in 2016. This is based on our expectation that capacity at each of the affected plants will fall by a third during the upgrade process. However, the phased implementation of the upgrade will minimize the impact on the overall utilization.

We anticipate that CJE's cash flow will remain flattish in 2018. The company plans to complete the majority of the upgrade this year, with the rest in 2019. Partly moderating the negative impact is the commissioning of a few new WTE facilities in Shangdong, Heilongjiang, and Ningxia over the past few quarters, with an expected waste treatment capacity of 2,800 tpd.

CJE has executed its overseas expansion plan faster than our original expectation. The company announced two overseas acquisitions in the second quarter of 2018. This includes a WTE project company in Brazil (the final terms are still under negotiation) and a WTE project company in Indonesia with 1,000 tpd capacity for a total investment of US$120 million. We believe CJE's overseas expansion plan is to diversify its geographic exposure as the WTE market in China is becoming saturated. CJE plans to enter overseas markets such as India, which has a large population, similar demand for waste treatment facilities as in China, and a favorable policy.

We estimate that CJE will have negative free operating cash flows over the next 12-24 months despite the completion of a Singapore dollar (S$) 107 million share placement in May 2018 and disposal of two subsidiaries. CJE sold the shares due to its high capital commitment for new WTE projects and the considerable time required for these WTE facilities to generate cash flows.

We affirmed the rating because we expect a recovery in CJE's financial metrics over the next 12-24 months. In addition, the rating is supported by CJE's stable business model with contractually-protected long-term concessions, favorable regulatory framework, leading market position, broad geographical exposure, and good service quality record. This is despite the persistent pressure from increasingly stringent environmental standards and execution risk in new projects in China and overseas.

We assess CJE's stand-alone credit profile as 'bb'. We view the company as a strategically important and insulated subsidiary of the parent group, Hangzhou Jinjiang Group Co. Ltd. (HJG). CJE is the primary platform for the group's pillar energy and environmental segment. It has a close association with the group's brand name and a record of support from the group. However, its earnings contribution to the group is insignificant, compared to the core alumina and aluminum production business of the group.

Our assessment on HJG's credit quality mainly reflects our view of the group's high exposure on non-ferrous metals production and trading. We believe HJG has a weaker credit profile than CJE because its businesses are subject to commodity-price volatilities and overcapacity in China's aluminum industry. Moreover, HJG's financial leverage is elevated owing to its historical capital spending on capacity expansion, and its dependence on short-term financing. We assess the group is facing the refinancing pressure, given its large maturing debt in 2018 and its narrow and high-cost financing channels. Nevertheless, HJG's is one of China's largest private alumina producers. It has effective cost controls, mainly from satisfactory self-sufficiency on power usage, and benefits from a recent recovery in aluminum and alumina prices following China's efforts to reduce excess capacity.

The negative outlook on CJE reflects the risk that the company's FFO-to-debt ratio may stay below 15% over the next 12 months owing to weakening cash flows and higher capital expenditure from capacity upgrade projects.

The outlook also reflects the company's accelerating overseas expansion plan, which may burden its weakening financial metrics. It also reflects the refinance risk of the parent group amid gradually tightening liquidity in the onshore market.

We may lower the rating on CJE if the company's FFO-to-debt ratio stays consistently below 15%. This could happen if:
  • The execution risk with the company's facilities upgrade plan limits the recovery in the WTE business;
  • More stringent environmental standards by governments affect the company's businesses, resulting in a weakening in the business or financial risk profile; or
  • CJE makes any large acquisitions or investments that are beyond our expectation.

We may also lower the rating on CJE if the parent group's FFO cash interest coverage consistently stays below 2.5x. This could be due to: (1) the group continuing to rely on short-term borrowing and facing heightened liquidity and payment risk, such that its borrowing rate continue to increase; or (2) the group's cash flows declining due to weakening industry conditions or larger capital expenditure than we expect.

We may also downgrade CJE if the likelihood of negative intervention from the parent group increases.

We may revise the rating outlook on CJE to stable if we expect: CJE to sustain its ratio of FFO to debt at more than 15% over the next 12-24 months. This could happen if CJE's facilities' upgrade goes on smoothly, such that the utilization rate and gross margin recover gradually over the next few quarters; and The parent group to maintain its FFO cash interest coverage consistently above 2.5x, successfully refinance its large maturing debt, and improve its capital structure by replacing short-term borrowing with long-term debt.


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